Posted: 01 / 04 / 2021
From 6 April 2021 the rules for off-payroll working, known as IR35, are changing. After this date, all public sector clients and medium or large private sector clients will be responsible for deciding workers’ employment status.
If the off-payroll working rules apply, any payments made to workers will be subject to Income Tax and National Insurance Contributions.
What does this mean in practice?
If you are a public sector or medium or large private sector end client who uses contractors, you will need to assess each contractor before they start working with you to determine whether the off-payroll working rules apply. You are effectively considering whether the contractor is classed as employed or self-employed for tax purposes. If the off-payroll working rules do apply, you will need to deduct income tax and NIC via the PAYE system from the net of VAT payments you make to the contractor. There will also be additional costs for you as the end client, such as employers National Insurance and Apprenticeship Levy payments.
You will need to prepare a Status Determination Statement (“SDS”) which includes confirmation of the contractor’s employment status along with reasons for reaching this conclusion. The SDS must:
- Be in writing
- Identify the parties in the supply chain (for example the contractors personal service company)
- Include the conclusion of the assessment with a reasoned argument for the conclusion
- Provide details of how to appeal the assessment (see below)
When assessing the contractor, the end client will need to consider the following criteria:
- Degree of control over the contractor (how, what, where and when)
- Mutuality of obligation (whether the end client has to offer work and the contractor has to accept it)
- Where does the financial risk of not delivering the work on time or on budget lie
- Whether the contractor is in business on their own account
- Whether the contractor is part and parcel of the end clients organisation
- Who provides the equipment used by the contractor
- Whether the contractor can send a substitute to complete the work
- Whether there was any intention of an employment relationship by any of the parties involved in the contract
HMRC has also provided an online tool which can be used to assess a contractors employment status, along with a series of examples from both an end client’s and contractor’s perspective.
An appeals process must also be in place to allow contractors to appeal the SDS conclusion. Where an appeal is requested by a contractor, the end client must reassess the position and confirm within 45 days the result of that reassessment. Following the appeal, the end client should update their SDS (where appropriate) and provide a copy to the contractor.
If you are a contractor, you need to be aware that your customer may assess you to be within the off-payroll working rules and as a result Income Tax and NIC will be deducted from payments made to you. Your company will then receive any VAT invoiced in full and the settlement of its invoice net of PAYE, NIC’’s and any other employment deductions. The amounts subjected to this treatment will not be taxable in your company and so will be removed from the corporation tax computation. You will still need to complete a personal tax return to declare any dividends and the amount processed by your customer as Gross salary, but relief will be given on tax already paid.
You should obtain a copy of the SDS from your customer to retain as evidence of the off-payroll working assessment. You can appeal the conclusion of the SDS with the end client if you disagree with their decision. Note that you will need to obtain a separate SDS for each individual engagement.
HMRC has prepared a simple flowchart to help contractors understand when the off-payroll working rules will apply which can be accessed here.
Exemption for small businesses
If you are a small private sector end client, the responsibility for assessing the off-payroll working rules after 6 April will remain with the contractor. The definition of small for this purpose is meeting at least two of the following criteria:
- Annual turnover no more than £10.2 million
- Balance sheet total no more than £5.1 million
- No more than 50 employees
These rules are complex where the end client is a member of a group. In these cases please contact us for more information.
Note that there is no small business exemption for the public sector.
What if the end client gets the assessment wrong
HMRC has announced that if the end client does not take reasonable steps in the assessment process, any underlying Income Tax and NIC will remain the liability of the end client. “Reasonable steps” has not been defined, but we understand this would typically include:
- Not performing an assessment or preparing an SDS
- Performing a sweeping assessment of all contractors (as opposed to assessing each individual contractor on their own merits)